How your credit score affects car insurance rates | finder.com
How your credit score affects car insurance rates

How your credit score affects car insurance rates

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It’s controversial, but a lower score could lead to higher premiums.

If you’ve applied for a credit card, loan or mortgage, you’re familiar with your credit score and how it affects your rates. But car insurance companies play a different ballgame.

When you apply for a car insurance policy, most insurers check your credit-based insurance score and use it to set your premiums. Drivers with good credit are usually rewarded with lower rates, though the practice is banned in some states.

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What is my credit score?

When you hear credit score, it usually refers to your FICO score or VantageScore — a three-digit number that reflects your creditworthiness. It paints a picture of your financial behavior and lets lenders know if can manage a loan and pay your bills on time.

However, car insurers don’t look at your regular credit score. Instead, they analyze certain aspects of your credit history to create a credit-based insurance score, which is weighted differently.

This is because insurance companies only care about the information that relates to potential car insurance losses. Unlike lenders and financial institutions, they aren’t concerned with your location and income, though both aim to determine the level of risk. Agencies like FICO, LexisNexis and TransUnion calculate credit-based insurance scores (CBIS).

These agencies look for:

  • Payment history, including late payments and delinquencies
  • Length of credit history
  • Number and types of credit accounts, such as credit cards and loans
  • Outstanding debt
  • Credit utilization
  • Applications for new credit

Why do insurers check credit scores?

Insurers check your credit-based insurance score to predict whether you’ll file claims. Insurance is all about balancing risk, so they use that information to decide if they’ll offer you coverage and to set your premium.

But what does your credit history have to do with your risk as a driver?

According to the Insurance Information Institute, there’s a direct correlation between credit and insurance claims. Statistics show that drivers with low insurance scores are more likely to file frequent and costly claims and receive payouts than those with high insurance scores. It also claims that individuals with low scores are the ones who tend to exaggerate claims or commit insurance fraud.

FICO adds that there’s a link between the way people use credit, and the way they drive and maintain their car. In other words, if you’re careful with credit, experts argue that you’ll be more careful on the road. In an independent study, the Federal Trade Commission also found that insurance scores are effective predictors of risk.

Insurers err on the side of caution, which is why these statistics have led many to crack down on drivers’ creditworthiness. They aren’t willing to take on more risk than they need to, even though the use of credit-based insurance scores is controversial.

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Can insurers check my credit in my state?

Unless you live in California, Hawaii or Massachusetts, you can assume that your car insurer will pull your credit-based insurance score. In those three states, the practice is banned. Instead, your rates will be determined by your driving record, driver profile and personal information.

A few other states restrict the use of credit information for renewals and cancellation. For instance, in Pennsylvania, insurers can only check your credit when you’re renewing your policy, and can only use it if it results in a lower rate.

In Texas, Georgia, Utah and Washington, insurers can’t legally use a customer’s credit score as the sole reason for denying or not renewing coverage.

New York, Illinois, Florida and Texas stipulate that insurers disclose if and when they used credit information in their decision to deny, cancel or not renew a policy.

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How is my credit score used?

The extent that your credit score affects your rates varies between providers. That’s because insurers use their own algorithms to calculate rates. However, if you have a low score, you’re deemed a higher insurance risk and may end up paying a higher premium. On the flipside, if you have a low score, you’ll likely be charged a lower premium.

Since insurance companies look at different aspects of your credit history than creditors and lenders, they use different formulas to evaluate you.

Each agency has its own model for credit-based insurance scores. TransUnion’s scores range from 200 to 997, with a good score of 770 or above.

If you have a high credit-based insurance score, an excellent driving record and no recent claims, you’ll typically qualify for lower rates. In comparison, drivers with average insurance scores may pay 24% more, while those with poor credit scores could face an increase of 91%.

Since your credit score impacts your insurance score, it helps to assess both scores side by side. Let’s say you’re an unmarried person in New York driving a 2017 Toyota Camry. When it comes to auto insurance, there’s only a 17% price difference between good and fair credit, but bumping your credit score from poor to fair could save you over $1,700 a year.

Why do some consider credit scoring unfair?

Although they’re widely used, credit-based insurance scores are hotly contested. Its opponents say that they unfairly punish those who are dealing with financial factors out of their control, such as medical debt or layoffs. These situations can really hurt your credit, even if you’re a responsible spender. Some compare it to redlining and argue that it discriminates against minorities and low-income applicants. They say credit scoring drives up insurance costs for those groups who are least able to pay.

For other consumer advocates, credit scores simply aren’t relevant to driver risk. They argue that there’s no connection between driving skills and spending habits, and that driving records and claims histories are much better indicators of risk. That’s why some states are banning this practice.

How do I check my credit score?

You can request a copy of your credit report from the three major credit reporting agencies — Equifax, Experian and TransUnion — once a year. Your score may also appear on your credit card or loan statement.

For your credit-based insurance score specifically, you can purchase the score created by LexisNexis and FICO through each of their sites. However, to obtain your TransUnion score, you’ll have to ask your insurance provider for access.

If you live in Illinois, Missouri, Colorado, Tennessee or Kansas, you can take advantage of Say Insurance. The startup provides your LexisNexis score for free when you request a quote for one of its car insurance policies.

How do I improve my credit score?

Knowledge is power! To boost your credit-based insurance score, start by requesting it. On the report, you’ll see a list of factors that went into the calculation of the score. Rebuilding your credit score takes time, but these steps will put you on the right track.

  • Start at the top of the report. The first two factors listed in the report have the most significant effect. Focus on these areas of improvement first.
  • Order and review your credit report. Check it for accuracy. If you find any errors, file a dispute with the appropriate credit bureau.
  • Pay your bills on time. This proves to lenders that you’re reliable and can manage your finances. It also helps you to skirt late fees, which can really add up over time. If you have trouble remembering to pay your bills, you could try paying your credit card bills twice a month. That’s also a good way to pay back more than the minimum and get ahead of any extra debt on your account.
  • Fix late payments. If you have a legitimate reason for missing a payment, consider writing a goodwill letter to your creditor.
  • Be conservative with your credit. Aim to utilize 30% or less of your available credit. For instance, if your credit limit is $1,000, keep your balance below $300. This shows lenders that you’re only spending money you can quickly pay back.
  • Don’t open too many new accounts. Every time you apply for a credit card or loan, it’s listed on your credit report and may drag down your score. For now, avoid applying for unnecessary lines of credit.
  • Pay down any debt you may have. The more aggressively you pay off debt, the better.

What are my options if I have bad credit?

If you’re stuck with a less-than-stellar credit score, you can apply with insurers that cater to high-risk drivers. The insurers below cover drivers with poor to fair credit.

The catch? These insurers accept just about everyone, which means you can expect to pay a higher premium even if you’re not considered high risk. By not checking or caring about your credit, insurance companies assume more risk, so they raise your rate to protect themselves.

  • The General. This provider exclusively sells car insurance to risky drivers.
  • Progressive. Offers nonstandard coverage for drivers who may run into problems getting a policy from other providers.
  • Bristol West. A subsidiary of Farmers Insurance, it sells policies through a network of local agents and brokers.
  • Titan. This Nationwide subsidiary offers nonstandard coverage across 22 states, mostly in the South.
  • Geico Casualty. Apply with Geico, and if it deems you a high risk, its Casualty subsidiary will take over.

Compare insurance providers

Name Product Roadside assistance New car protection Available states
Allstate
Included free
Yes, cars under 2 years old
All 50 states
Enjoy having your own dedicated agent to help you get the best discounts and coverage.
Liberty Mutual
Included free
Yes, cars under 1 year old & 15,000 miles
All 50 states
Car insurance through Liberty Mutual will give coverage options for almost any situation.
Root
Included free
No
AZ, AR, DE, IL, IN, IA, KY, LA, MD, MI, MS, MT, NM, ND, OH, OK, OR, PA, TX, UT
Root offers simple, affordable insurance that’s ideal for good drivers. Try the Root app for 2 weeks and see how much you could save. Available in 20 states.
Esurance
Optional
Yes, cars under 1 year old & 15,000 miles
All states except AK, DE, HI, MT, NH, VT, WY
Esurance offers a modern online and mobile experience that helps you take your insurance on the go. Available in 42 states.
Metromile
Optional
Yes, cars under 1 year old & 15,000 miles
CA, IL, NJ, OR, PA, VA, WA
Drive less than 30 miles a day? Save on the coverage you need with pay-per-mile insurance from Metromile. Get a low monthly rate then pay just a few cents per mile. Available in CA, IL, NJ, OR, PA, VA and WA.
USAA
Included free
No
All 50 states
USAA offers affordable car insurance with highly rated customer service to millions of military members and their families. Only available to military members, veterans and affiliated military members.

Compare up to 4 providers

When do insurers check my credit?

When you apply for a policy, around 90% of insurers will ask for your permission to check your credit score. They’ll then pull your credit report from one of the three major credit bureaus and use that to calculate your insurance score. Insurance companies do a soft pull, which appears on your credit report but typically won’t harm your score.

Does my current insurer check my credit?

It depends on where you live. In the following states, insurers must recalculate credit scores every three years, which means that you could score a cheaper rate if your credit history has improved.

  • Arkansas
  • Colorado
  • Florida
  • Georgia
  • Iowa
  • Louisiana
  • Montana
  • Nevada
  • New Mexico
  • New York
  • North Dakota
  • Oklahoma
  • Tennessee
  • Virginia

Outside of those states, your current insurer doesn’t have to factor your new-and-improved credit score into your renewal rates. And in Alaska, insurers can only use your credit score when you first buy a policy.

Bottom line

Over 90% of insurers check your credit score to establish your eligibility and determine your rates, along with other factors. It’s a common, though controversial, practice in most states.

If you have a high credit-based insurance score, a clean driving history and zero claims on your record, you’ll typically qualify for cheaper rates. And while it’s possible to get a policy without a credit check, you’ll probably pay a higher premium.

Each insurer has its own algorithm, so be sure to shop around for the best rate.

Find the cheapest rates

Compare the best car insurance companies near you.

Your information is secure.

Frequently asked questions

Katia Iervasi

Katia is a freelance writer from sunny Sydney, Australia. Her writing — and curiosity — has taken her around the world, and she now calls chaotic, creative New York home. She navigates insurance and finance for Finder, so you can splash your cash smartly (and be a pro when the subject pops up at dinner parties).

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